State Pension Fund to Invest $200 Million in Israeli Fund

By JAMES C. McKINLEY Jr.

Published: June 18, 2003

Correction Appended

ALBANY, June 17 — The state comptroller has decided to invest $200 million of state pension funds in Israeli companies through a private equity fund that will focus on infrastructure projects and other traditional investments, officials said today.

The decision by the comptroller, Alan G. Hevesi, will make the state one of the largest private investors in Israeli industries at a time when foreign investment in the violence-wracked country has been shrinking.

Mr. Hevesi said he saw the potential for strong profits from old-fashioned industries, like road construction, in Israel, despite the current violence there. He said the Israeli government's desire to privatize state-owned airlines and telecommunications companies also presented lucrative investment opportunities for the fund managers.

"There is enormous potential to make substantially above-market-rate profits for the pension fund," he said in an interview. "The government is very much amenable to this kind of investment." The investment could also pay political dividends for Mr. Hevesi, though he denies any such motivation.

The new fund, called Markstone Capital Partners, was started recently by a California financier, Elliott Broidy, and two high-profile Israeli businessmen, Ron Lubash, a former managing director at Lehman Brothers, and Amir Kess, a former executive of Arison Holdings.

As comptroller, Mr. Hevesi has unilateral control over the $109 billion Common Retirement Fund, for retired government employees outside New York City. About $10 billion of the fund's assets are invested in stocks overseas, while $1.7 billion is invested in private venture capital funds, like the Markstone group in Israel.

State officials said the Markstone fund would have about $500 million, with New York being the largest single investor. The fund is the brainchild of Mr. Broidy, who runs his own investment company, Broidy Capital Management, in Los Angeles and is active in Republican politics. Mr. Broidy could not be reached for comment tonight.

The partnership is still lining up commitments from private investors, Mr. Hevesi said. Mr. Broidy is also courting the California and New York City pension systems, Mr. Hevesi said.

Pua Gordon, a spokeswoman for Markstone, declined to comment, saying federal regulations prohibited her from speaking before the partners had finished obtaining signed commitments from all the investors.

Last month, Mr. Hevesi said, he and Mr. Broidy went to Israel to meet with Prime Minister Ariel Sharon, Finance Minister Benjamin Netanyahu and other officials. "They were extraordinarily encouraging," he said. "We have expectations there will be no governmental barriers to moving ahead."

In recent years, most Israeli investors have been pouring money into technology companies, leaving a lack of capital for areas like construction, state officials said.

Mr. Netanyahu praised the state's decision to invest in Markstone on a visit to New York City on Monday, when he spoke to business leaders and asked them to consider investments in Israel, officials at the Israeli Consulate said. He went on to Washington today to lobby for loan guarantees for Israel.

As a rule, state pension officials do not influence investment decisions when they put money into a private equity fund. Instead, they set goals for the fund managers to meet and let them invest the capital.

Correction: Nov. 11, 2006

An article on Nov. 3 about disputed actuarial methods used by Alan G. Hevesi, the New York State comptroller, in making disclosures about the state’s pension funds referred incorrectly to an investment he made in a company whose chief executive contributed to his re-election campaign. (The same error appeared in articles on Nov. 2 , about the responsibilities of the comptroller’s office, and on June 18, 2003, about Mr. Hevesi’s decision to invest $200 million in Israeli companies.) The investment, with Markstone Capital Group, was made in a private equity fund that invests in Israel, not a venture capital fund.